If the Greek sovereign debt debacle has taught us anything, it is that long-term assistance to an ailing customer has to be carefully and sustainably managed.
Perhaps that is why there has been a lot of white noise recently about arrears, following the FSA’s guide to meeting forbearance and impairment regulatory standards. It was a welcome, and not to mention timely, reminder for lenders.
According to the latest Bank of England Credit Conditions report, it remains unclear whether sufficient provisions are in place to deal with distressed loans across the banking system.
The Bank of England warned 60% of Lloyds’ lending book is high or very high LTV, while RBS and Santander have roughly a third of their lending in that category.
Given the threat forbearance poses to lenders’ balance sheets, it is high time they grasped the issue by the horns.
Too often industry discourse on forbearance misses the importance of TCF, particularly when it comes to arrears counselling.
There are a number of options available to lenders.
They could be more draconian, but this would be counterproductive. It would increase repossessions and squeeze customer finances at a point when they are already being ransacked by high inflation and a stagnant economy.
A better option would be to give customers better advice on how to manage their arrears and to apply more sustainable and appropriate forbearance depending on a customer’s circumstances.
It is not a case of one rule fits all. Each customer needs advice based on a close analysis of their personal situation. This way everybody wins.
The lender meets its TCF obligations and reduces the risks to its balance sheets. In addition, the customer is given a more appropriate solution, reducing the risk of repossession.
At the moment, lenders are stuck with cumbersome and archaic in-house systems that are too expensive to replace.
They often have to manage more than one system after mergers with different brands, which makes pulling together data difficult. This, by extension, makes assessments of customer circumstances inefficient and dysfunctional.
Lenders often attempt ad hoc solutions of their own, which are local to each operational team. This in turn creates inconsistencies and inefficiencies in lenders’ management of arrears cases.
It is the equivalent of sticking a plaster on a broken leg.
The FSA has warned that poor arrears management advice is placing customers in a worse position in the long term.
It says cases warrant much more rigorous levels of executive scrutiny and that current technology systems cannot cope with the volume of cases being processed.
As a result, customers are being given poorer advice and unsustainable repayment packages. This exacerbates the problem that it is supposed to help.
This is where technology enters the picture. The key to all this is better data.
Currently, lenders are making decisions about the most appropriate form of forbearance for a customer without having access to all the data.
Inefficient internal control systems cannot cope with increasing account volumes, meaning each case does not get a sufficient level of scrutiny.
What lenders need is their own control process of data and third parties. A return of data to a lender in a single and consistent format makes it easier to view case history. It also makes the process more efficient, allowing lenders to view a greater volume of cases in more detail.
By understanding a customer’s circumstances better, lenders can offer more appropriate arrears advice and assess which forbearance options are the most affordable.
Better information allows managers to assess whether it is best to recover a loan or to allow a build up of arrears to continue. By offering better advice they are meeting the FSA’s codified TCF regulations and also minimizing the risk of a build-up of a contractual shortfall with their customers.
With arrears and repossessions cases likely to rise as the threat of a second recession moves closer, lenders require more effective means to analyze cases where customers are threatened with a build up of arrears.
